Is Kentucky About to Give Billions in Tax Breaks to Data Centers? - Kentucky Center for Economic Policy

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Jason Bailey | July 23, 2026

The massive surge in proposed data centers is prompting intense debates about their costs and benefits. One question emerging across the country is whether and to what extent states should subsidize data centers with public tax dollars. These concerns are growing as tech companies look to locate data centers all over the country and with the proliferation of new, artificial intelligence (AI)-driven “hyperscale” centers that are many times the size of the previous generation of data centers — making the cost of their tax subsidies that much larger.

Kentucky currently has a data center tax break on the books. The state’s sales tax exemption applies to the purchase of equipment and can last up to 50 years, though the state has not awarded any of these exemptions yet. Given publicly available information about the size of proposed data centers in Kentucky and industry data on average costs, we estimate that the commonwealth could easily forgo over $1 billion in sales tax revenue if this exemption is awarded to just a few large centers. The data center tax break, which was only estimated to cost $15 million a year previously, could quickly become the largest tax expenditure on the books in Kentucky. This subsidy would be awarded to the world’s most valuable companies even as they eagerly seek localities willing to accept data centers and meet the enormous and still-speculative demand for AI processing capacity.<br>More On Budget & Tax: Medicaid Cut Vulnerability Index Shows Which Kentucky Counties Are Most at Risk

In this rapidly-changing context, decision makers should think twice before handing over such a huge amount of state General Fund dollars through this exemption. This money would otherwise go to fund schools, Medicaid, infrastructure and other services that are receiving cuts in the current and recent state budgets. A growing number of states are engaging in serious debates about the merits and wisdom of data center tax breaks, with proposals and plans to pause, limit or end these subsidies.

Kentucky’s tax subsidy is for the purchase of equipment and can last up to 50 years

In 2024, the Kentucky General Assembly created a sales tax exemption for data centers that covers virtually everything purchased to outfit and maintain them. The original bill was limited to Jefferson County, but in 2025 lawmakers expanded the tax break to the entire state. The Cabinet for Economic Development has not yet awarded any of these exemptions but may soon consider doing so.

The sales tax exemption applies to all data center equipment and software including servers and routers as well as systems related to electricity, cooling, water usage and security. The only purchases that are not exempt from the sales tax are for development of the site, construction of the shell building, the purchase of electricity and the provision of office equipment related to administration of the data center.

That means most data center costs are subsidized under the sales tax break. Industry benchmarks show that only roughly 10%-15% of the cost of a data center is the land, basic site work, foundation and shell building. The remainder is the computer processing equipment and the machinery used to power and protect it, practically all of which is exempt from the sales tax under Kentucky’s law.

To qualify for the tax breaks, a data center must have a minimum capital investment of $450 million in counties with at least 100,000 people (currently Jefferson, Fayette, Hardin, Boone, Daviess, Kenton and Warren); $100 million in counties with 50,000-100,000 people (Bullitt, Campbell, Christian, Greenup, Laurel, Madison, McCracken, Nelson, Oldham, Pulaski and Scott); and $25 million in counties with less than 50,000 residents. The exemption can last up to 50 years for data centers with investment of over $450 million and 25 years for smaller centers.1 The computer equipment in data centers typically must be replaced every 3-5 years, resulting in additional tax breaks every few years until the incentive expires.

Tax breaks for proposed and potential data centers could easily cost billions of dollars

The more data centers that locate in Kentucky — especially hyperscale centers with their thousands of servers and miles of connection equipment — the more sales tax revenue will be forgone because of this tax exemption. The recent proliferation of proposed data centers across Kentucky provides a sense of what the exemption could cost the commonwealth.

The only data center under construction now is in southwest Jefferson County. This facility, being built by Powerhouse Data Centers/Poe...